Setting the Bar

During the debates surrounding the energy bill President Bush eventually signed last fall, Democrats argued long and hard for a national, mandated target for renewable energy production, called a renewable portfolio standard (RPS). That provision’s opponents, notably the electric utility industry, argued that existing RPS rules at the state level already were boosting renewable production. New research indicates this just may be the case.

Currently, 25 states and the District of Columbia have regulations requiring utilities that operate within their borders to buy a targeted percentage of the electricity they sell from renewable sources. Typical programs mandate 20 percent by 2020, with intermediate goals set between now and then. However, some states have goals that reach even higher.

During the energy bill discussions, utilities argued that opportunities for renewable energy vary too widely across the country to make a national mandate fair. Instead, they said, the combination of state-level regulations in areas where renewable supplies are available and voluntary “green-pricing” programs elsewhere was a better way to build market demand. Now, it seems, these two market drivers may be creating what has been seen, up until now, as the holy grail of renewable energy: financial viability.

“I think there has been even greater interest in the voluntary market than people expected,” said Lori Bird, a senior analyst with the National Renewable Energy Laboratory in Golden, Colo. “But now, I think most people think the RPS market is the biggest driver, and the voluntary market is complementary to that.”

Bird recently co-authored two National Renewable Energy Laboratory (NREL) reports regarding the supply and demand of renewable energy and the relative importance of voluntary pricing programs and RPS mandates in growing the renewable-energy market. Interestingly, these two drivers could, in the short term, create renewable-supply shortages in some states and regions. Renewable-energy supporters say such a situation could pull even more new players into the market.

“It’s a good thing for demand to get a little more stretched,” said Alex Pennock, manager of Green-E Energy, a nonprofit group that certifies renewable-energy sales. “I think more demand will stimulate more activity.”

Proving green-energy origin

Green-E helps utilities and other marketers of voluntary renewable-energy purchasing plans prove that the electricity they’re selling as renewable comes from qualifying sources. Understanding why such certification is necessary requires an understanding of what you are—and are not—actually buying, if you participate in such a program.

You are not buying actual electricity in these programs. Participating in a green-pricing plan doesn’t necessarily mean new renewable plants will be built in your region. In fact, the beneficiary may be a wind farm hundreds—or thousands—of miles away from you, and the electricity powering your new big-screen TV could still be coming from a fossil-fuel plant. Instead, your contribution pays the premium between the prevailing kilowatt-hour rates and the actual cost of producing those kilowatt-hours by whichever renewable means that generator uses.

The generator, in this case, actually has two customers. The first is the local grid operator, which buys the electricity at the prevailing rate, regardless of the generation source. The second is the voluntary--pricing participant, who is paying the difference between that prevailing rate and the actual cost of production (along with ancillary expenses associated with running the program).

The receipt, if you will, for that premium payment is a renewable energy certificate (REC), which allows the purchaser to claim that electricity’s renewable benefits. For individuals, buying RECs may be a way to assuage an environmentally sensitive conscience. But large companies use RECs to burnish their corporate images, making them increasingly valuable commodities.

Green-E’s role is to certify that each REC can be tracked back to renewably produced kilowatt-hours and that the resulting electricity wasn’t also counted against any existing RPS in the state in which the plant is located. This is the point where voluntary efforts and regulated mandates can bump up against each other, and protections against such “double counting” are critical to the success of both markets.

Bird said rising natural-gas prices and falling wind-power costs are lowering the cost of green-power premiums in many voluntary programs, but that could change as state RPS purchase mandates begin to ramp up.

“In the short run, there could be a supply shortage. If there is a shortage, prices will go up. But it’s not clear, exactly, where that’s going to be. It’s going to be either state- or region-specific,” she said.

A big unknown in the growing market for new renewable-energy production is the fate of tax credits for renewable-power developers. Last year’s energy bill didn’t address the credits. Legislation under consideration at press time would extend the credits for at least a year and possibly longer. Without this added assistance, which forms a vital third leg of financial support to the green-power industry, prices for all renewable energy purchases—whether voluntary or state-mandated—are sure to rise.